PROPERTY FINANCE

by kjgg1104 | Aug 9, 2008 | Industry Interest, Media, Media Coverage

01 August 2008 – Ian Fife

The rain has come and the banks want back the umbrellas that they begged us to take when the sun was shining.

Mortgage lenders are charging new borrowers more than the 5,5 percentage point increase in interest rates that has occurred since June 2006, and lending them less.

According to bond originator ooba (another trendy company that refuses to use a capital letter in its name), lenders were charging the average home loan borrower 1,3% below prime in June 2006, 1,31% in 2007 and 1,25% in June this year.

The borrower of R1m in June 2006, when the prime overdraft rate was 10,5%, got his mortgage at 9,2% and paid R11000/month. Today, he would be paying 14,7% on his bond and R12900/month. But a new borrower will pay 14,75% and R13000/month.

It’s the same story with commercial property. Nedbank corporate property finance head Frank Berkeley says: “Where our rate was, say, 1% below prime before, it could now be 0,5% below.”

But it’s not only the interest rate. Banks are applying more stringent credit criteria and declining more bond applications, says ooba CEO Saul Geffen. “Decline ratios are up 10% from before the National Credit Act came into force in June 2007, and credit and affordability declines are 50% up.”

Banks are also not giving borrowers the 100% loans-to-value (LTV) that they were giving a year ago, says Simon Stockley, MD of Integer (a joint venture between Investec and Purple Capital that combines a home loan with a bank account). The maximum loan on a R3m home loan is now 75%.

Nedbank home loans chief Greg Salter says the environment is a lot riskier, with lower returns on economic capital.

FNB credit head Dawie Spangenberg says it’s the global credit crunch. “Liquidity is scarcer and the banks are paying more for the money they borrow.”

Absa asset-backed lending chief Gavin Opperman says it’s higher capital requirements for banks, as a result of the Basel 2 agreement on banks’ capital adequacy requirements.

Integer’s Stockley says it’s because SA banks are not competitive enough, aren’t motivated to provide more sophisticated products, and don’t have to compete on price. “For instance, this is the only country in the world where the banks don’t advertise their interest rates,” says Stockley. “There’s a wide range of sophisticated products available in the world that are not offered here.”

Integer intends introducing products with interest rates fixes and caps (already offered by SA Homeloans) and nonrecourse and equity participation mortgages that could reduce rates and risk.

But the relative lack of derivative products has saved SA’s banking sector from much of the global credit crisis caused by the collapse in subprime investments. “We have money to lend,” says Nedbank’s Berkeley. “It’s just that we no longer offer low interest rates aggressively, mainly because of the cost of money to us.”

Adds FNB head of commercial loans Gerhard Zeelie: “A good deal’s a good deal. If there is strong cash flow, we have the funds available to lend.”

Many commercial and residential property investors have built substantial equity in their homes over a decade of growth. They also have strong net cash flows. Many homeowners have mortgage-backed bank overdrafts, with enough value built to see them through the interest rate pressure – “their get out of jail card”, notes Stockley.

But more recent buyers don’t have that privilege, and many will not be able to survive the high instalments they might have to pay through to the end of 2009.

If in 2006, when the prime rate was 10,5%, they could have taken out a 20-year fixed-interest mortgage – like most Americans do, they wouldn’t be struggling. And why are none available? Mainly because it’s not part of the SA home-loan culture.

Says Opperman: “Absa has introduced a 10-year mortgage at very attractive rates below prime, for mortgages with an LTV less than 80%, but we’ve had few takers.” Banks could borrow the 20-year money to back fixed-interest loans, “but not the R700bn that makes up the current home-loan books,” says Salter. And the volatility of SA’s interest rates could make 20-year money prohibitively costly.

Another problem is creating mechanisms to get out of the bond before 20 years. “The average home loan lasts about six years,” says Opperman.